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Old 10-30-2015, 12:57 PM   #1
Slava
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You can read my latest here: http://victorlough.com/blog/1918775-...-like-gambling

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When people think of gambling in a broad sense I assume they equate the risk and reward to things like a roulette wheel, or slot machine, or maybe in less times the lottery. Those are not good proxies for the stock market, and have almost no relation to investing. But when you look at gambling and in particular Poker, you have a much higher correlation with investing and the stock market and here's why:
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Old 11-01-2015, 01:57 PM   #2
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1. There is a finite amount of money. When you make money in the stock market, someone else is losing. It might not feel this way, but that's the way it is. Same goes for poker. You sit around the table and if you win a big pot against your opponents, someone else contributed to that big pot.
Isn't this point fundamentally wrong. For longs and shorts fine but the entire stock market is based on economic growth giving the player the edge instead of the house.

I disagree with your general premise entirely. In poker some players are better than random distribution of luck would indicate. The same can't be said in investing.
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Old 11-01-2015, 08:41 PM   #3
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Isn't this point fundamentally wrong. For longs and shorts fine but the entire stock market is based on economic growth giving the player the edge instead of the house.

I disagree with your general premise entirely. In poker some players are better than random distribution of luck would indicate. The same can't be said in investing.
First of all, thank you for reading and posting something!

To your first point, I'm not sure I understand what you mean? I do agree that the stock market is based on growth, but the gains an investor makes are still at someone's expense. It doesn't necessarily feel like that, but it is the way it works.

As far as the general premise, that is a whole other discussion (and one that I would love to have to be entirely honest!), but I do believe that there are investors who do better than luck. There is a book about the luck vs. skill spectrum which goes through investing as well as a number of sports and other areas that is quite fascinating. Its an easy read written by Michael Mauboussin and his premise is that he thinks a lot of things, including investing are a combination of skill and luck. http://www.amazon.ca/The-Success-Equ.../dp/1422184234

I don't know how far you want to get into the whole discussion here about whether investors can do better than random luck. I will just say that even the passive strategies that are more in vogue today require a lot of decision making for the investor. Because of that a lot of factors like investor psychology and their assessment of risk comes into play.
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Old 11-14-2015, 08:12 AM   #4
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First of all, thank you for reading and posting something!

To your first point, I'm not sure I understand what you mean? I do agree that the stock market is based on growth, but the gains an investor makes are still at someone's expense. It doesn't necessarily feel like that, but it is the way it .
I'd also disagree with this point. Let's say I invest $1.00 per share in an exploration company whether by private placement or simply buying the shares in the open market. Company uses funds from private placement to drill and discovers something of economic value, produces it, sells it, increases earnings and the value* of my $1.00 share goes up. Or alternatively having bought the $1.00 share on the open market I simply take part in the upside sell and move on.

*Ignoring the dilution aspect of a private placement and assuming the money raised/spent increased value more than dilution.

In both instances no one has lost. The actions of the company have increased value for everyone. Someone may have sold me the share at $1.00 had I not participated in the private placement but they could have bought the share at $0.75 and profited.
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Old 11-14-2015, 08:20 AM   #5
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Well that's right, but it's only half of the equation. For you to "take part in the upside sell" you have to sell your shares to someone else. In other words you have someone else to buy those shares for say $1.25. I suppose that this is a bit abstract, but economically there is only so much money in circulation in an economy at any one time. So for you to gain that $0.25 means it is coming from somewhere, and someone else is losing that $0.25 for it to end up in your pocket here.
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Old 11-14-2015, 10:40 AM   #6
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Well that's right, but it's only half of the equation. For you to "take part in the upside sell" you have to sell your shares to someone else. In other words you have someone else to buy those shares for say $1.25. I suppose that this is a bit abstract, but economically there is only so much money in circulation in an economy at any one time. So for you to gain that $0.25 means it is coming from somewhere, and someone else is losing that $0.25 for it to end up in your pocket here.
No it's not.
The gain is from growth. That's generally how the economy works. No one lost $25 cents. Just like when the bank writes a mortgage or sells any lending product. I take that money and do what I please with it (could be positive, could be negative) the bank then earns interest on that money. Same with the deposit of funds, I deposit, early paltry interest on the deposit, the bank can go out and lend a greater amount of money using my deposit as a reserve allowance.

In the stock/equity example I sell at $1.25 to someone else who may sell for $1.50 down the line. There's doesn't always have to be a loser.

You're making the assumption that the second or third buyer is going to be a new loser. Which isn't necessarily true.

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Old 11-14-2015, 05:15 PM   #7
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Investing is a zero sum game though; there is no money that magically appears from thin air, and if you agree that its finite to being with, there is a winner and loser. So if there is $100 in the whole economy and you invest $1.00, when you later get $1.25 for that same share that means someone somewhere has last that $0.25. Its not possible that you just grew the extra $0.25 and no one else lost. It might appear that way, and I understand how an individual investor would see the market that way, but like I say, its zero sum.
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Old 11-14-2015, 05:18 PM   #8
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Investing is a zero sum game though; there is no money that magically appears from thin air.
What about dividends?
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Old 11-14-2015, 05:23 PM   #9
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What about dividends?
Dividends are a percentage of profits. So that money is already in the economy and already circulating. Someone has spent that money somewhere for the company to gain it and distribute it (in the common sense of dividends, and not companies using other methods to maintain them).
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Old 11-16-2015, 08:16 AM   #10
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http://www.investopedia.com/terms/z/zero-sumgame.asp

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DEFINITION of 'Zero-Sum Game'
Zero-sum is a situation in game theory in which one personís gain is equivalent to anotherís loss, so the net change in wealth or benefit is zero. A zero-sum game may have as few as two players, or millions of participants.

Zero-sum games are found in game theory, but are less common than non-zero sum games. Poker and gambling are popular examples of zero-sum games since the sum of the amounts won by some players equals the combined losses of the others. Games like chess and tennis, where there is one winner and one loser, are also zero-sum games. In the financial markets, options and futures are examples of zero-sum games, excluding transaction costs. For every person who gains on a contract, there is a counter-party who loses.
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Most of the money in our economy is created by banks, in the form of bank deposits Ė the numbers that appear in your account. Banks create new money whenever they make loans. 97% of the money in the economy today is created by banks, whilst just 3% is created by the government. This short video explains:

http://positivemoney.org/how-money-w...-create-money/
It simply isn't a zero sum game. If I raise capital (borrow from banks, investors etc.) a lot of that money comes from credit. It is then grown by my company which may then be purchased for more. Let's say Suncor buys my company with cash that they've profited from a similar exploration, discovery, production process.

Or, let's say I use my $5.0 million raised to find a gold mine and sell to goldcorp for $50 million. All the investors earned $10 for every $1.0 invested. They pay back their credit facilities and wealth has been created. Gold corp has done the same thing. They didn't simply go into debt by $50 million whether they used a credit facility or not.
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Old 11-16-2015, 08:26 AM   #11
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Dividends are a percentage of profits. So that money is already in the economy and already circulating. Someone has spent that money somewhere for the company to gain it and distribute it (in the common sense of dividends, and not companies using other methods to maintain them).
That's simply not true.
Companies and economies grow by creating value.
If I take $100 and use it to dig a hole and find $1000 worth of gold I've added $900 worth of value to the economy.

If I created a company with 10 investors, who each put in $10 then they all sold their shares for $20, they've all made $10. Now I find the gold and divide it up equally between the current stock holders and dissolved the company they've each gained $80, and no one has lost a thing. It's not a zero sum game.

If what you're saying is true, then neither the economy, nor the stock markets could never grow, which is plainly false.
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Old 11-16-2015, 09:02 AM   #12
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This is really interesting discussion and thanks for your posts. I am really re-thinking things here. The thing is that we know the market is finite. So if the total market today is worth a set amount (whatever that is), and someone gains in the market then by definition someone else must lose.

And BBS, your example doesn't quite fit here. Is the gold actually increasing the value of the overall economy or is it just commanding a bigger share of the economy? I think its the later, where the gold doesn't actually mean that the economy is increased by that percentage, but that you get a slightly larger piece of the same pie.

That said though, I can see the point you guys make regarding the overall growth of the market and I can't completely account for that. So I guess I feel like the market is zero sum at any one point, but maybe that doesn't hold in the longer term, big picture. I don't know if that makes sense either, but I think that's where I am...

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Old 11-16-2015, 04:46 PM   #13
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This is really interesting discussion and thanks for your posts. I am really re-thinking things here. The thing is that we know the market is finite. So if the total market today is worth a set amount (whatever that is), and someone gains in the market then by definition someone else must lose.

And BBS, your example doesn't quite fit here. Is the gold actually increasing the value of the overall economy or is it just commanding a bigger share of the economy? I think its the later, where the gold doesn't actually mean that the economy is increased by that percentage, but that you get a slightly larger piece of the same pie.

That said though, I can see the point you guys make regarding the overall growth of the market and I can't completely account for that. So I guess I feel like the market is zero sum at any one point, but maybe that doesn't hold in the longer term, big picture. I don't know if that makes sense either, but I think that's where I am...
In your first paragraph you say that the market is finite, but that's simply not true. The market as a whole can/does grow and shrink. Yes the market is finite, but that doesn't mean it can't grow over time, and as they say, a rising tide lifts all ships.

As to your second point, yes the gold does increase the value of the overall economy. If it didn't then we would never have seen any sort of growth in weath, or standard of living. We've clearly seen both of those things, so saying that creating/finding something of value simply commands a part of the already existing economy rather than adding to that overall value is just incorrect.

As for your final paragraph, it's not that the market is a zero sum game at any one point, that's not even true for a single stock. In fact it's the exact opposite of that.

If the market/a stock starts a a certain value, then at some point in time it will either be higher or lower than at that starting point. At that point in time on the whole it is either a net positive or negative gain. Yes there will be some winners and losers, but if the price is higher than it started, the sum total of winners and losers will be positive, if it's lower, then the sum total will be negative. The point of creating a company or market is to increase value. You do that by finding or creating something of value which adds to the overall value of the company. By it's very nature the market cannot be a zero sum game.
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Old 11-17-2015, 09:07 AM   #14
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Yeah I guess that while I'm somewhat swayed and think you're right, I also think that there are some elements here that lean toward my points as well. The market is finite at any given moment. That point means that when someone gains, someone has to lose by definition. I just don't understand how you get around that.

I do think that the other six points I wrote about in my post still stand however. Even if I am wrong on this one (which I could very well be), I don't think that I'm completely out to lunch here.
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Old 11-17-2015, 10:49 AM   #15
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Yeah I guess that while I'm somewhat swayed and think you're right, I also think that there are some elements here that lean toward my points as well. The market is finite at any given moment. That point means that when someone gains, someone has to lose by definition. I just don't understand how you get around that.

I do think that the other six points I wrote about in my post still stand however. Even if I am wrong on this one (which I could very well be), I don't think that I'm completely out to lunch here.
While it's true that it's finite at any given moment, where you are making a mistake is that you aren't considering that your position as winner or loser isn't based soley on the current state/size of the market, it also includes the state in the past where you entered the market.

If at that point all the market conditions are the same then you're right, for every winner there is an equivalent loser.

But we know that's not true, the size/value of the market fluctuates up and down.
If it's up, then the winners will outweigh the losers, and vice versa.
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Old 11-17-2015, 11:32 AM   #16
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Yup, that is a very good point for sure.
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Old 11-18-2015, 10:28 PM   #17
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Good blog post. Gambling in the long run is always a losing proposition because of the vigorish. With every hand or roll of the dice the players have a negative expected return as the odds are slightly in the house's favour.

With the broader stock market, however, the odds are now in the investor's favour. The stock market has a long-run annual return of about 8% when adjusted for inflation. Brokers still take their transaction fees but the expected return for someone invested in the broader market is still positive.

I disagree with the argument that for an investor to make money someone else is losing money. As the famous saying goes....a rising tide lifts all boats. The market goes up and all long investors make money.
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Old 11-19-2015, 09:20 AM   #18
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Who knew that all I needed to do to get some posts and reaction here was to say something that no one agrees with!
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Old 11-19-2015, 09:43 AM   #19
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I forgot I posted here

I like to think of the economy like thermodynamics. The 1st law of thermodynamics is that energy can't be created or destroyed only transferred from one medium to another.

Extending this out money is a representation of energy. Human labour plus energy extracted from the ground. So essentially the economy can only expand if we add stored energy into the system via resource extraction or add human energy to the system more people entering the workforce or become more efficient and using either of these sources of energy.

So while on a universe level scale it's a zero sum game on an earth scale the stored energy in the earth in oil,iron, coal etc and the energy from the sun which feeds humans can be converted into economic growth.

However when we reach a point where the cost of energy increases or we stop growing as a population or stop getting more efficient economic growth will slow or stop.

I'm going to grab that book you mention as well. I do agree with you though that the risk management side of an investment adviser is valuable as while I don't believe stock picking is a skill setting acceptable risk tolerance for a probability of an acceptable rate of return is.
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Old 06-14-2016, 09:09 AM   #20
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The stock market has a long-run annual return of about 8% when adjusted for inflation.
Is this accurate? The TSX is up an annual return of 6.1% since July 1979, and that's without taking inflation into account. So what's that, 3% if you consider inflation?

Kind of makes me want to just pay off my mortgage instead of taking the risk.
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